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Relation of Partners to Third Parties under Partnership Act | Important Acts and Laws for Judiciary Exams PDF Download

Section 18: Partner as Agent of the Firm

  • A key principle in the relationship between partners and third parties is established in Section 18, which states that a partner acts as an agent of the firm.
  • This implies that every partner represents the firm in its business dealings. The actions of one partner legally bind all partners, similar to how a principal would be bound by their agent's actions.
  • Mutual agency among partners is crucial for the formation of a partnership. This concept is fundamental in partnership law and is akin to the relationship between a principal and an agent.

Partnership Law and Agency

  • Partnerships are based on the principle of mutual agency, where each partner acts as an agent of the partnership.
  • According to legal scholars, such as Mr. Justice Story, every partner assumes the roles of both principal and agent within the partnership structure.
  • Lord Wensleydale's perspective highlights that in a partnership where individuals agree to conduct business together and share profits, each partner serves as both a principal and an agent.
  • This dual role means that each partner is responsible for the actions and contracts of the others within the scope of their trade, similar to how a principal would be accountable for the acts of their agent.
  • A partner, within a firm, acts as an agent specifically for the firm's business purposes. Their authority extends to activities necessary for the firm's operations such as entering contracts, buying or selling goods, and securing loans. The firm is legally bound by these actions. However, if a partner engages in activities unrelated to the firm's business, like purchasing materials for personal construction or borrowing money for personal reasons, the firm is not liable as these fall outside the scope of the partner's agency.
  • Provisions in Sections 18 to 30 of the Indian Partnership Act outline the relationships between partners and third parties.
    These provisions are categorized as follows:
    • Nature and extent of the firm's liability for a partner's actions (Sections 18-27)
    • Doctrine of Holding Out, which imposes liability on non-partners (Section 28)
    • Rights of a partner's interest transferee (Section 29)
    • Status of a 'Minor' granted partnership benefits (Section 30)

Nature and Extent of Liability of the Firm for the Acts of a Partner (Sections 18-27)

The discussion on the liability of the firm for a partner's acts is categorized as follows:

A. Nature of Liability of the Partners towards Third Parties

B. Types of Acts Partners are Liable for:
i. Liability for the acts done within the authority of a partner (Ss 18, 19, 20 and 22). Such authority may be either express or implied authority.
ii. Liability when a partner acts in emergency (S 21).
iii. Liability on ratification of a partner’s act.
iv. Liability for admission made by a partner (S 23).
v. Liability on notice to an acting power (S 24).
vi. Liability for torts and wrongful acts (S 26).
vii. Liability for misapplication of money or property (S 27).

Nature of Liability of the Partners towards Third Parties (Section 25)

Section 25 explains the liability of partners towards third parties:

  • Liability of a Partner for Acts of the Firm: Every partner is jointly and severally liable for all firm acts during their partnership. Partners collectively bear responsibility for all acts of the firm. This is because each partner is considered an agent of the firm for business purposes. Therefore, all partners are accountable for any act carried out by any partner. Section 25 specifies that each partner shares joint and several liability for all firm acts during their partnership.

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According to Section 18, in a partnership, a partner acts as an agent of the ________.
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The Liability of Partners in Business

In a legal context, the liability of partners in a business entity is a crucial aspect that determines the extent of responsibility and accountability each partner holds. Let's delve into the different facets of partner liability:

The Nature of Partner Liability

  • Partners' liability is joint and several, meaning that each partner is collectively and individually responsible for the firm's obligations.
  • A third party has the right to take legal action against any partner individually or multiple partners jointly.

Types of Acts for Which Partners Are Liable

Acts done within the partner's authority:
  • Express Authority: This type of authority is explicitly granted through spoken or written words.
  • Implied Authority: This authority is inferred from circumstances, such as the ordinary course of business dealings.

For example, if Partner A is authorized to collect Rs. 5,000 from Partner B, Partner A implicitly has the authority to file a lawsuit for recovery if needed.

Implied Authority: Mode of Exercising Authority

S 19(1) defines implied authority, subject to the provisions of s 22, which dictates how a partner's act can bind the firm. Section 22 states that for an act to bind a firm, it must be done in the firm's name or in a way that shows intent to bind the firm.

Section 22: Mode of Doing Act to Bind the Firm

An act or instrument done by a partner or another person on behalf of the firm must be executed in the firm's name or in a manner that expresses an intention to bind the firm.

  • In the name of the firm
  • In a manner expressing or implying an intention to bind the firm

Partner's Authority in an Emergency (S 21)

Even without express or implied authority, a partner can bind the firm in an emergency situation as described in s 21.

Section 21: Partner's Authority in an Emergency

A partner, in an emergency, has the authority to take actions necessary to protect the firm from loss, similar to what a prudent person would do in similar circumstances.

Ratification and Admissions in Partnership Law

  • Ratification of a Partner's Act: When an agent carries out an action on behalf of a principal without prior authorization, the principal can later approve or ratify the act. If the principal ratifies the act, it is considered as if the agent had the authority from the beginning. For instance, if a partner enters into a contract on behalf of the firm without explicit permission, the other partners can later agree to this act.
  • Admission Made by a Partner (Section 23): Section 23 states that any admission or statement made by a partner regarding the firm's affairs is considered evidence against the firm if it is made in the regular course of business. This is because each partner is seen as an agent of the firm in its business dealings. For example, if one partner admits to signing a contract or making a payment on behalf of the firm, this admission holds weight for all partners. However, such admissions can be challenged with contrary evidence.
  • Effect of Notice to an Acting Partner (Section 24): According to Section 24, informing a partner who regularly conducts the firm's business about any firm-related matters is equivalent to informing the entire firm. This notice is considered valid unless it involves a fraud against the firm that the partner is complicit in. For instance, if a partner who handles contracts for the firm is informed about a new deal, this information is binding for the whole firm unless it involves fraudulent intentions.

Effect of Notice to an Acting Partner (Section 24)

  • Section 24 states the impact of providing notice to an acting partner.

Liability for Torts and Wrongful Acts (Section 26)

  • A principal is held accountable for the wrongful acts and torts committed by their agent during the agency's business.
  • According to Section 26 of the Indian Partnership Act, the firm is equally liable for any loss or injury caused by a partner's wrongful actions in the ordinary course of business or with the partners' consent.
  • In the case of Hurruck Chand v Gobind Lal, when one partner knowingly engaged in selling stolen goods without the other partner's knowledge, both partners were found responsible for the conversion tort to the goods' owner.

Liability for Misapplication of Money or Property by a Partner (Section 27)

  • Section 27 addresses the firm's responsibility for a specific type of wrongdoing committed by a partner, specifically the misapplication of money or property.
  • Under Section 27, the firm is held liable to compensate for losses in scenarios where a partner misuses money or property received from a third party within their apparent authority, or when misapplication occurs while the firm holds the money or property.

Doctrine of Holding Out (Section 28)

The Doctrine of Holding Out under Section 28 is a crucial concept in partnership law. It deals with situations where a person who is not officially a partner in a firm may still be treated as a partner concerning their liability to third parties. This is not because they are a partner in reality, sharing profits, or participating in management, but because they are held out or deemed to be a partner according to the principles of estoppel. This legal doctrine is essential for understanding the extended liabilities in certain partnership scenarios.

Rights of Transferee of Partner's Interest (Section 29)

  • Partnership relationships are built on trust, requiring the consent of all partners for the introduction of a new partner.
  • No partner can transfer their share to an outsider without the agreement of all existing partners.
  • If a partner transfers their entire interest to a third party, the other partners can seek court intervention for firm dissolution.
  • A partner can transfer their interest in the business to a third party.

Section 29: Rights of Transferee of a Partner's Interest

Transferee's Rights During Firm Continuance

  • A partner's transfer of interest doesn't allow the transferee to interfere in business operations, demand accounts, or inspect books.
  • The transferee is entitled to receive profits share of the transferring partner and must accept the agreed-upon profit accounts.

Transferee's Rights on Firm Dissolution or Partner Ceasing Partnership

  • Upon firm dissolution or the transferring partner's exit, the transferee can claim the assets share and demand an account from the dissolution date.
  • Section 29(1) covers rights during firm continuance, while Section 29(2) addresses positions on firm dissolution or partner exit.

Transfer of Partner's Interest:

  • During a partnership's existence, when a partner's interest is transferred, the transferee does not gain the right to interfere in the firm's business operations. Additionally, the transferee cannot demand access to the firm's accounts or inspect its books. The transferee is obligated to accept the profit-sharing arrangement agreed upon by the partners. 
  • Their sole entitlement is to receive the profits share of the partner who transferred their interest. The rationale behind restricting the transferee from involvement in business operations is rooted in the foundational principles of partnership, which emphasize mutual trust and confidence among partners, precluding external interference.

Position of a Minor in Partnership (Section 30)

  • For a partnership to be established among multiple individuals, a contractual agreement must be in place, as the partnership relationship arises from contract rather than inherent status. This necessitates the fulfillment of all essential elements of a valid contract, including the capacity of all partners to contract. 
  • Since a minor lacks the legal capacity to enter into a contract, any agreement involving a minor is considered void, rendering the minor incapable of being a partner in any partnership firm. If a minor is mistakenly included as a full partner in a partnership, the partnership deed becomes invalid, and the document cannot be legally enforced, even against other partners.

Question for Relation of Partners to Third Parties under Partnership Act
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What is the nature of partner liability in a business entity?
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